Investment on direct-to-consumer brands, why are they unheard of

In 2010, Dave Gilboa, Neil Blumenthal, Jeff Raider and Andrew Hunt launched Warby Parker, a direct-to-consumer (DTC) eyewear brand that lets consumers try glasses at home before purchasing them. The idea of selling eyeglasses on e-commerce seemed ridiculous at the time. Most eyewear in the market were sold through a licensing business model. More than a decade later, Warby Parker has turned into a $3 billion company. The company in 2020 bagged Series G funding.

Soon after the success of Warby Parker, DTC brands became the buzzword of the industry and caught the attention of media and investors. ThingTesting, a social media account dedicated to reviewing direct-to-consumer products, found success in providing in-depth review of direct-to-consumer brands.

Thanks to social media and technology, brands no longer need to rely on billboards or print-out catalogues - they are now able to directly reach and engage with consumers.

Selling DTC is not a new concept. Plenty of MSMEs and fashion brands in the country are DTC brands. DTC brands are simply brands that sell directly to customers without any middle man. They usually focus on online space. One of the most popular local DTC brands is Cotton Ink. Founded in 2008 by Ria Sarwono and Carline Darjanto, the brand has expanded from online to brick-and-mortar stores.

Albeit the large pool of local direct-to-consumer DTC brands, large scale investment to them is unheard of. In neighbouring countries, there are Singapore-based Love, Bonito with Series B funding in 2018 and Thailand-based Pomelo with Series C funding in 2019. On the other hand, the latest round of investment from venture capital to local DTC brand was to Brodo last year. Until today, large scale investments are dominated by tech companies.

According to a survey conducted by TFR, 74% brand founders prefer to bootstrap their business. 17% of respondents chose to borrow capital from friends and family. Only 9% opted to apply for bank loans. Applying for funding from investors or venture capitalists is the least popular option. Undergarment brand Nipplets, one of the respondents, cites not having a full control as the downside of having investors on board.

“We don’t want to lose creative direction,” said Athena Athleisure on the question why the brand is not interested in investment. “The benefit of having investors is that [we] can expand the business in many ways, but the downside is the pressure to fulfil target and agreement,” said beauty brand Bloomka.

Growing a brand without investment, is it possible?

Sara Blakely, founder of underwear brand Spanx, started the company in 1998 with $5,000 from her savings. Spanx banked $4 million of sales within one year and $10 million in the second year after Oprah Winfrey claimed the brand as her favourite on her show. Blakely remains the sole owner of the company and became a billionaire in 2013.

Learning from Spanx, creating one-of-a-kind product is the main factor in growing a sustainable brand without external investment. Spanx specialises in shapewear or body-shaping undergarments that makes the body appear slimmer and sleeker in clothes, especially body-fitting clothes.

For the record, Blakely doesn’t invent shapewear. The first shapewear ever recorded in history is girdle in the Ancient Greek Era, followed by corsets. Blakely took an existing idea and improved it. It took her a year to develop a prototype and test the product on her friends and family.

Ready-to-wear brand Cotton Ink started with Rp1 million. Both founders bootstrap the entire operations. “Honestly, until 2020, we were still using self-funding from the initial capital of Rp1 million and be smart in structuring sales and payment,” said Cotton Ink co-founder and CEO Carline Darjanto. The only external funding the company applied for is bank loans.

In its early days, Cotton Ink used a pre-order system that lets the brand receive down payment from customers before paying vendors. The strategy allows them to cut down production costs and reduce dead stocks. “Focus on items that sell and [items that can] turn the money around,” Carline stated. Cotton Ink finds a sweet spot in casual, comfortable attires that are still appropriate for the workplace.

“Planning is everything. [You] Have to make the right scenario of cash in and out. Brands have to [try] as much as they can to possess uniqueness or value that is different from what’s in the market, creative in marketing and spending budget, so [they] can grow slowly without having to stress out thinking about fundraising,” said Carline.

Otherwise, brands raise capital after they have captured the market. Nike - previously named Blue Ribbon Sports - started with $1,200 from both founders. But Nike isn’t self-funded forever. The sportswear giant went public in 1980. Going public is an option to raise capital. Supreme, too, was acquired by a private equity last year to expand its operations.

Selling direct-to-consumer has its own sets of advantages and challenges. Brands get higher margins since they don’t have to pay commissions to retailers or department stores. Founders get the authorities to run the business and make decisions as they see fit. Taking care of everything - research, development, design, production, warehouse, logistics, marketing - in-house can lower costs and churn more effective operations in the long run.

Inditex, the parent company of Zara, does almost everything on its own. Instead of outsourcing their entire production to manufacturers in countries notorious for cheap labour, Inditex shifts some of its production to factories nearby its headquarters in Spain or in neighbouring countries. Although the production cost might be higher, turnaround time is faster than dispatching products across the world. In return, Inditex is able to launch products once every two weeks.

However, doing everything in-house can also be a double-edged sword. Inventories, warehouse and distribution, for instance, can be liabilities if they are not managed properly. Global companies like H&M and Burberry faced backlash when they were caught burning their excess stocks. Excess stocks or dead stocks are unsold products taking up space at warehouses and they represent lost revenue.

Then there is mandatory PR and marketing strategy. Building reputation and winning consumer trust are continuous efforts. Another alternative is selling at well-known retailers or department stores at the expense of slashed profit margin. Either way, they can incur high costs, especially for brands that specialise in luxury products.

Achieving huge success without external investment is certainly possible. The decision whether to take on investment or not depends on how fast a brand wants to grow and scale up. In some cases, it’s not solely about the cash. Brands are seeking mentorship and connection from the investors. The next question is, where do we find investors?

To be discussed in part two.